Celebs’ & Billionaires’ Economic Warnings ?

One of the things we have harped on around here is the tendency for humans to be backwards looking in their sentiment.

The Recency Effect means we monkeys place disproportionate emphasis on recent stimuli or observations, regardless of worth or significance. Indeed, investors become bullish after they buy stocks, bearish after they sell them, as part of the self-rationalization process to justify their actions.

Consider: In October 2007, 4 days from the all time market top, the WSJ discussed how unlikely another 1987-like crash was (Exorcising Ghosts of Octobers Past). That was a backwards looking perspective, coming after 5 years of upwards market movement.

Perspectives sure changed following the economic collapse: One week after the Flash Crash, the WSJ noted how “the May 6 selloff had parallels to 1987” (How the ‘Flash Crash’ Echoed Black Monday); Is it any surprise that a 55% collapse in indexes during the prior 30 months subsequently impacted the tone of that article? (Note: We discussed both of these articles here).

The above psychological factors are what makes me point out the following two economic comments making the rounds. They fall into the category of recession-porn, and are worth considering.

The first is an “An Important Note Of Caution” from motivational-speaker Tony Robbins. He references a Trader who got the 1987 crash correct, then was wrong and lost money for many years, then made some good calls, and did not-great-but-good in 2008. Robbins references this trader as a warning about the next economic collapse. Without access to the person’s trading history, it sounds more like a case of Fooled by Randomness to me.

The second is mark Cuban’s recent pronouncement to “Put Money in the Bank,’ Not Stocks.” In a blog posting, Cuban noted that The Stock Market is still for Suckers. Note that cash has outperformed stocks over the past 5 years. Such pronouncements to “sell stocks, go all cash” from Cuban would have been quite valuable in 2005, less so in 2010.

(UPDATE: Cuban responds here)

~~~

I don’t doubt the business acumen of either of these gentlemen; Each is wildly successful in their chosen fields. However, I cannot help but note that neither of their fields involve analyzing the data that goes into determining economic or market collapses. Indeed, it smells more like a case of Recency effect than anything else.

Note that I am not talking my book: We have been mostly cash since May 5th (as much as 100% then, 50% cash in June). We are now over 80% cash, and are looking for a move down towards 950 on the SPX. So what both of these commentators are saying actually matches both our positioning and our perspectives (as well as this AM’s futures).

What I am pointing out is the unusual perspective of two businessmen discussing a crash that is so far outside of their expertise, following a 55% drop from the market top, and a 16% drop from the April highs. Perspectives such as this would be more valuable before, rather than after, a huge crash. (We will revisit these in 6 or 12 months).

It reminds me in some small part of the parade of sports figures and celebs on CNBC in late 1999 discussing their equity trades, or the Playboy bunny turned RE Agent in 2005 (also on TV) just as that market peaked. These were all late cycle momentum calls, as opposed to insightful analysis based on new data, fresh perspectives, or creative research.

I doubt the Cuban/Robbins calls rise to the level of full contrary indicator, but it makes me nervous to be on the same side of the trade of what can be described as “scared” or “dumb” money.

>

Previously:
Experts, Crashes, Media, Skepticism (February 19th, 2009)

1987 Redux: Impossible or Likely? (May 18th, 2010)

Sources:
An Important Note Of Caution
Tony Robbins, August 3rd, 2010
http://business.tonyrobbins.com/78/an-important-note-of-caution/
Tony Robbins Economic Warning (You Tube)

The Stock Market is still for Suckers and why you should put your money in the bank
BLog Maverick Aug 20th 2010 11:24PM
http://blogmaverick.com/2010/08/20/the-stock-market-is-still-for-suckers-and-why-you-should-put-your-money-in-the-bank/

‘Put Money in the Bank,’ Not Stocks, Cuban Says: Chart of Day
David Wilson
Bloomberg, Aug. 23 2010
http://noir.bloomberg.com/apps/news?pid=newsarchive&sid=ag4SWrlru.hc